Mandatory and voluntary participants of Ontario’s recently launched cap-and-trade market need to make decisions in the face of uncertainty. US-based Tracy Kayhanfar, the Senior Director or Environmental Management with ConAgra Foods, describes some of the challenges they faced at the launch of California’s program and what lessons they take with them as they prepare to voluntarily participate in Ontario’s newly launched program. Kayhanfar was interviewed by Adrienne Baker, Director at Canadian Clean Energy Conferences, which is organising the Apr. 26-27 Ontario Cap-and-Trade Forum in Toronto.
Adrienne Baker: What were some of the challenges you faced in developing a compliance strategy in the early days of California’s cap-and-trade market?
Tracy Kayhanfar: One of the biggest challenges was developing a strategy with confidence. There was a lot of uncertainty on the number of allowances that would be allocated for industrial assistance and I was forecasting future emissions so developing a strategy to acquire allowances was challenging. There was also a lot of speculation on the settlement price of the allowances.
We were unsure whether to participate in the first auction because of the speculation around a potential increase in the settlement price. We had to weigh out the risks versus the benefits of participating in that first auction. In the end, we decided to try to obtain the gap in the allowances that we had identified would exist at the end of Compliance Period 1 and we were able to purchase them at US$10.09 per metric tonne.
I was tasked with compliance and it was a very uncomfortable conversation to ask senior management for hundreds of thousands of dollars to buy carbon allowances because the question was: What is the return on investment? The answer “none” wasn’t very well received. I had to say that based on the research I have done, we should participate in this first auction.
So, that became our strategy at the beginning: let’s take a chance to set ourselves up to be successful in the first compliance period so that we can then take a step back to evaluate our longer-term position.
That would be my advice to Ontario companies, don’t wait too long to participate in an auction because if you wait until you have to participate, your hands might be tied because you don’t know how many other companies have also waited to participate.
AB: Looking back now, what were some of the benefits and risks of participating in the California auction early on?
TK: The primary benefit of participating early on in California was that the level of uncertainty and confusion around the auction process caused a lot of people to stay away from the initial auction. In addition, registering to participate was a complex process that I think many companies didn’t complete. The hesitation and complexity resulted in a lower than anticipated settlement price.
The risks were largely unknown because we didn’t know how the program would morph. Would there be cheaper options for compliance outside of purchasing allowances or should we hedge buying allowances to cover us up for the first compliance period?
AB: What are some of your key concerns around the post-2020 market in California?
TK: My biggest concern is that, from the state of California perspective, there isn’t a compelling strategy on how to be successful with such an ambitious carbon reduction plan. The mandate they have stated in Senate Bill No. 32 (SB 32) is a 40% reduction in emissions from 1990 levels which will require a lot more than just an increase in electric transportation.
It will require an evaluation of all the state’s economies to get to those levels – it is a very ambitious goal.
AB: What advice would you offer an Ontario company that is new to cap-and-trade compliance?
TK: Preparing for tomorrow is about doing your best today. I don’t know all the details of Ontario’s program but there is a lot of uncertainty and companies don’t really know what to expect.
We are in our last year of our second compliance period and we are still doing work to obtain the data that is necessary to determine the accurate assistance factor and leakage risk for food manufacturers. Further assistance factors are in a state of constant flux so it’s important to air on the side of caution.
Companies don’t want to put money into allowances that won’t get used for a few years but even worse is being at risk of not having enough allowances for your annual or triannual deadlines. The penalties are steep: you have to pay four times the amount of allowances you are short which is the same in Ontario.
We are a voluntary participant in Ontario. We have a facility in Dresden just over the 10,000 metric tonnes of greenhouse gas emissions limit so we decided to opt in.
AB: What are some of the next steps for your carbon strategy?
TK: We had two facilities that were covered by California cap-and-trade and we just ceased operations at one facility. So, our biggest next step is to figure out how a plant closure impacts the allowances we are given.
Tracy Kayhanfar is one of the speakers at the Ontario Cap-and-Trade Forum, which takes place Apr. 26-27 in Toronto.